The following information has become available since the staff report was issued to Executive Directors. The thrust of the staff appraisal remains unchanged.

1. Recent indicators suggest that, as expected, economic activity recovered somewhat in the third quarter, although recent hurricanes could impact growth at the end of the year. The Bank of Mexico (BoM) now projects growth of 2¾ to 3¼ percent for 2005. The staff projection of 3 percent assumed a pickup in growth in the second half of the year. The index of overall economic activity rose by 4.5 percent in August over the previous year, faster than in recent months, while retail sales grew by 4.4 percent in real terms. September industrial production, on the other hand, showed almost no growth from a year earlier. Hurricanes Stan and Wilma struck parts of southern Mexico hard, but the BoM expects that their effect on GDP growth will be small.

2. Inflation has come down more than expected. Core inflation has continued to edge down, to 3.2 percent in the first half of October, while headline inflation has declined markedly, from just under 4 percent in August to 3.5 percent in September and 3.1 percent in the first half of October (12-month basis). September data show that increases in contractual wages remain around 4½ percent, as they have for some time. Notwithstanding some risk of agricultural price shocks from the recent hurricanes, recent developments suggest that headline inflation at end-2005 is likely to turn out below the staff report’s projection of 3.9 percent. Last week, the Bank of Mexico revised downward its end-2005 inflation projection, from just under 4 percent to about 3ν percent.

3. On October 28, the (BoM) announced that it would permit another 25 basis point easing of monetary conditions; the overnight interbank rate subsequently declined from 9¼ to 9 percent. This announcement was the third such move since monetary easing began at end-August, again with no change in the corto. The BoM also announced that it will shift to monthly, rather than twice monthly, policy meetings, linking this move to the fact that inflation has become more stable and predictable than in the past.

4. Third quarter trade data indicate somewhat faster export growth than in the first half of 2005. The value of total exports in U.S. dollars grew 13ν percent in the third quarter, compared to 11 percent in the first semester (for non-oil exports, the figures were 9ν percent and 8¼ percent, respectively). The value of imports continued to grow at an annual rate of about 12 percent, about the same rate as in the first six months of the year.

5. The 2005 budget dispute was finally resolved, and discussions on the 2006 budget are expected to be completed by November 15. The remaining dispute over parts of the 2005 budget was resolved in late October, when deputies and the executive reached agreement on the composition of spending for the year. On the 2006 budget, the house of deputies has approved a revenue law which would allow budgeted spending to be about 1 percent of GDP higher than in the government’s proposal, as the deputies: raised the budget’s oil price assumption from $31.5 to $36.5 per barrel; raised projected non-oil revenue; and lowered the fiscal balance target from a small surplus to balance (traditional definition). The changes do not imply a significant revision of the staff report’s projections of the overall fiscal balance in 2006, and staff continue to expect that the non-oil augmented balance will be broadly unchanged from 2005.

6. The Mexican authorities have now officially requested an FSAP update, with the work to begin early next year.